So far, 2012 hasn’t just been a terrific year for homebuilder stock, but has probably been the best one since 2007. Many of the homebuilder stocks have doubled or tripled in the past year and closed sales, starts, permits, and builder sentiment have all been strong in the past month.

But what about now? Are the stocks themselves weakening or are they just part of the overall stock market pull back that we’ve seen since Election Day?

To put it simply: Yes. In my opinion, both possibilities are occurring simultaneously.

Red Flags

With the election over, the proverbial “wall of worry” has now begun to appear and could be casting a dark shadow over the momentum of homebuilder stocks. What are the problems looming ahead? How about:

A recent rise in the number of foreclosures. As banks begin to loosen up the reins again on the shadow inventory of over 2 million foreclosures nationwide, cheap foreclosures — especially in areas of newer homes — represent tough competition for new homebuilders.

The ongoing unemployment problem. This is compounded by recent statements from a few big-name CEOs saying higher costs from Obamacare may force them to layoff workers, or in some cases, simply to not hire any new ones.

The good ol’ fiscal cliff. You’ve heard it before: New taxes and spending cuts could precipitate another recession if politicians from both parties cannot find workable solutions within the next six weeks.

DR Horton (NYSE:DHI) and Beazer Homes, USA (NYSE:BZH) were some first signs of these issues. Both stocks got pummeled this week after reporting earnings, despite the fact that they posted vastly different results. BZH, which reported a wider-than-expected Q4 loss, dropped over 17% on Monday on very high volume of 7.9 million shares. The drop sent the stock crashing through the 200 day moving average, as seen below.

DHI, on the other hand, was up initially on a decent earnings report, as net income rose to $100.1 million, or 30 cents a share from the $35.7 million, or 11 cents, a year earlier. That was 2 cents better than analysts expected.

The stock reversed course, though, after CEO Donald Tomnitz gave a bearish outlook for 2013, including a prediction of weak employment growth. As he said on the conference call, “I still don’t see a lot of jobs being created. And I also see the fact that there are potential layoffs in a lot of industries, especially the defense industry.”

DHI finished nearly 6% in the red for the day.

His statement is particularly interesting given that, only one month ago, home construction reports were downright glowing. The pace of home building was at the highest since 2008, builder starts for September were up 15% from August, and permits were up 11.6% from the prior month.

Perhaps he had an inkling of the challenges ahead when he decided to sell $7.6 million worth of shares in September, despite the best construction numbers in the last four years.

Looking Forward

So what should the average investor do?

My advice is to cherry pick the better homebuilders now. For me, there’s a short list of solid companies left which includes Hovanian Enterprises (NYSE:HOV), KB Homes (NYSE:KBH) and Ryland Group (NYSE:RYL). These have been the strongest of the homebuilders in terms of relative strength for the past six months.

And of course, buy them only on pullbacks. HOV in particular is a volatile stock that is best purchased off a strong pull back — as I mentioned in a recent Investorplace article. Since hitting an intra-day high of $5.80 on Nov. 8, it has pulled back sharply, briefly touching $4.51 on Tuesday morning — a much more appealing price-tag.

Another good idea for investors of homebuilder stocks is to keep up with numbers showing unemployment, pending and closed new construction sales, construction starts and permits, along with the builders’ sentiment index. Such news will forecast the general direction that homebuilder companies and stocks are likely to travel over the next six months to a year.

As of this writing, Ethan Roberts does not hold a position in any of the aforementioned securities.